Why 1 clause in the US-Vietnam trade deal is sparking concern across Asia

The inclusion of a 40 per cent tariff on transshipped goods could ‘open up a can of worms’ for the whole region, analysts said

The United States announced it had reached a trade deal with Vietnam on Wednesday, which will see Washington impose a 20 per cent tariff on Vietnamese goods.

Businesses in Vietnam’s vast export sector initially reacted with relief to the news, as the 20 per cent rate is substantially lower than the 46 per cent so-called “reciprocal” tariff that the US threatened to impose on Vietnam in April.

However, the agreement has a sting in the tail. US President Donald Trump also said in a social post announcing the deal that goods deemed to be transshipped via Vietnam would face a far higher levy of 40 per cent.

It remains unclear exactly how the transshipment clause will work in practice, but analysts said the provision could have far-reaching implications – not only for Vietnam, but also for the wider region.

What is transshipment, and why is the US so concerned about it?

In its purest form, transshipment refers to exporters evading tariffs by diverting goods via a third country.

The US has grown increasingly concerned about a rise in transshipment since it began targeting China with sky-high tariffs earlier this year.

Trump administration officials allege that large volumes of goods are being exported from China to third countries – often in Southeast Asia – where their certificate of origin is altered, allowing them to be exported to America at a lower tariff rate.

It is unclear how much transshipment is occurring in reality. Some analysts have pointed to a sharp rise in both Chinese exports to Southeast Asia and Southeast Asian exports to the US in recent months to suggest that transshipment is indeed a significant issue.

But others have claimed the issue is overblown. A report by MUFG Bank said the impact of the transshipment tariff may be limited if enforcement only targets the most blatant cases of trade diversion.

Why has the new transshipment tariff attracted so much attention?

The special 40 per cent levy in the US-Vietnam deal is sparking discussion partly because it sends a signal about how seriously Washington is taking the issue of transshipment, and partly due to the uncertainty surrounding the policy.

The key question for businesses and policymakers is how the agreement will define transshipment. Will the higher tariff only apply to goods that have simply been diverted via Vietnam, or will it apply more widely?

It is a crucial issue because the supply chains of Vietnam (and other Southeast Asian nations) are closely intertwined with China’s. It is common for a product’s raw materials and components to mostly come from China, but for part of the production and assembly process to take place in Southeast Asia.

If those kinds of goods are also deemed to be transshipped under the new deal, then the higher tariff will “open up a can of worms” for the whole region, analysts at the financial services firm Nomura said in a research note on Thursday.

Many firms would struggle to avoid the higher levy under that scenario, as Asia “is heavily dependent on imports of intermediate products from China, and does not have a local ecosystem in place yet”, the note added.

What are the wider implications of this deal for Asia?

On the most basic level, the tariffs imposed under the US-Vietnam deal will have a direct impact on economies across Asia, as many regional economies rely heavily on exporting goods to America.

According to Nomura, if current tariff levels remain constant, they will put 1.7 per cent of Vietnam’s gross domestic product (GDP) at risk, as well as 0.8 per cent of China’s, 0.7 per cent of Thailand’s and 0.6 per cent of South Korea’s and Malaysia’s.

But some analysts said the transshipment tariff carried even greater significance, as it signalled the US was determined to reduce China’s role in the region’s supply chain.

“While the exact criteria for defining transshipment remain unclear, it is evident that Vietnam’s role as a potential connector for Chinese exports to the US will diminish,” said Su Yue, principal economist for China at the Economist Intelligence Unit.

Some analysts said they also felt it was more likely that other Asian economies would face higher US tariffs after seeing the details of the US-Vietnam deal. Most nations currently face a 10 per cent “baseline” tariff rate.

Euben Paracuelles, a senior economist at Nomura, estimated that if the US’ goal was to clamp down on goods being diverted via Southeast Asian markets, then the average tariff rate for the region would need to be raised from 10 per cent to 15.5 per cent.

It is also possible that the US may try to impose higher transshipment tariffs on other Asian economies, though any measures will hinge on airtight origin certification, as “rules can be porous and firms are nimble”, Nomura noted.

Bloomberg has reported, per Nomura, that the US wants to impose a rule on India stating that a product must have at least 60 per cent local value added to be certified as “made in India”, while India is pushing for a lower 35 per cent threshold.

What are the other details of the US-Vietnam deal?

The US and Vietnamese sides have yet to release the full text of the agreement, but Politico reported that it had seen a draft joint statement indicating that the US may eventually lower its tariffs on some Vietnamese goods after further negotiations.

Technology products, footwear, agricultural goods and consumer items such as toys are among the goods that may be included, Politico said.

According to Bloomberg, the US may apply lower tariff rates to products from Vietnam with high local value added, with 100 per cent locally-made goods facing only a 10 per cent tariff.

Meanwhile, Vietnam has agreed to slash its tariffs on US goods to zero, as well as address non-tariff barriers including intellectual property violations. It will also provide preferential market access for US agricultural products – such as poultry, pork and beef – and unspecified industrial goods.

The draft statement also confirms that Vietnam will finalise a long-anticipated US$8 billion purchase of 50 Boeing aircraft and sign memorandums of understanding for US$2.9 billion of US agricultural imports, according to Politico.